Chapter 11 aids London Fog in voiding leases

115 of 140 retail stores are to be gotten rid of in change of strategy

`Out of landlord's hands'

September 29, 1999|By Kristine Henry | Kristine Henry,SUN STAFF

London Fog Industries Inc.'s bankruptcy filing puts the company in a much better position to drastically shrink its retail presence by getting out of its store leases, analysts said yesterday.

The 77-year-old Eldersburg rainwear maker filed for Chapter 11 reorganization Monday in Wilmington, Del., saying it would close 115 of its 140 stores nationwide. London Fog officials said the company had made a strategic error in embarking on a retail expansion.

"Absolutely, that's one of the primary reasons they filed," said Mark Millman, president of retail consulting firm Millman Search Group Inc. in Lutherville. "It allows you to basically void leases. A landlord will hold you to a lease and the only way to walk away is by filing for bankruptcy. Otherwise you'd be sued by every landlord."

London Fog has 31 stores at Prime Retail Inc. outlet centers nationwide, and if the raincoat maker decides to leave, there's not a lot that can be done, said Jarrod Walpert, a Prime Retail spokesman.

"Basically when they file Chapter 11, they are pretty much allowed to do whatever they want in walking away," he said. "It's out of the landlord's hands; we are not involved in the process."

London Fog makes up less than 1 percent of Prime Retail's lease area and the company's departure should not have much impact on the Baltimore developer, Walpert said. London Fog has yet to publicly say which of its stores it will close. Its officials could not be reached yesterday to discuss how they would handle their leases.

Although a bankruptcy filing does allow for easier lease termination, it's not as simple as packing up and moving out.

A landlord always has a right to challenge lease terminations before a bankruptcy judge, said Alan Betten, a real estate attorney with Tabor, Betten and Berman PA. who represents commercial landlords. But landlords often have an uphill battle.

"There is only a very slight chance that a landlord will successfully oppose the rejection of a lease," he said.

Landlords do have more say, Betten said, when the bankrupt tenant intends to sell the lease to a new tenant and give the proceeds to creditors. Then a landlord has stronger footing to reject a new tenant, but that right is by no means absolute.

About three years ago a Delaware court ruled that restrictive-use clauses in a lease would not be in effect in bankruptcy cases. A restrictive-use clause gives landlords the right to limit what type of business may operate in their buildings.

No matter which option a bankrupt tenant selects -- selling or voiding the lease -- the landlord still has some room for redress and repayment.

"This is all to be paid, assuming there is money in the estate to pay it," Betten said. "If there is no money to be distributed, it doesn't matter [what the landlord's claim is]."